Where Bailout Funds Go to Die

When CIT Group (NYSE:CIT), a medium-sized lender, faced the threat of bankruptcy recently, it raised an uncomfortable prospect for the officials in Washington managing the bailout of the financial system. CIT got $2.3 billion in bailout funds last year--yet it was still failing. And the government decided not to offer any more help. So if CIT declared bankruptcy, taxpayers would be out their $2.3 billion.

CIT averted bankruptcy, for now, but the brush with insolvency highlighted one of the biggest risks of the entire bailout scheme: that taxpayers won't get their money back. That problem has been overshadowed recently by some good news from firms like Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM), which have paid back loans they got under the government's Troubled Assets Relief Program. So far, 34 companies have returned about $72 billion in TARP funds to the government, according to a bailout tracker maintained by journalism site ProPublica.

But nearly 700 firms have received bailout money, and many of them are still in rough shape. To gauge how much bailout money may be at risk, U.S. News asked the Ethisphere Institute, a private research group that studies corporate responsibility, to identify who the biggest TARP-jumpers are likely to be. Ethisphere publishes a TARP index, updated weekly, that measures the financial performance of all TARP recipients and calculates the "return" to taxpayers if the bailout funds are treated as an investment in the companies that got them. By that measure, the government has been a poor investor, losing about $148 billion so far--$1,233 per U.S. household. Ethisphere analyzed the same data, including results from the Federal Reserve's recent stress tests, to identify firms most likely to write off their debts to the federal government, either partly or completely.

Bailout architects like Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have argued that the government is likely to get most of the bailout money back, which would make it more like an interest-bearing loan than a giveaway. But since the bailouts began last fall, a number of developments have made it clear that the feds--and the taxpayers--can kiss some of that money goodbye. Ethisphere estimates that the following nine firms could end up costing the government the most when the final bailout accounts are tallied. Together, they account for nearly $220 billion in government bailouts, including TARP money and other funds.

AIG (total bailout received: $85 billion). It's hard to imagine a more complicated bailout than this monstrous money hole. The $85 billion includes $40 billion in TARP infusions and about $45 billion in loans from a government credit line. The Federal Reserve has paid an additional $47 billion for troubled AIG securities, which it hopes to resell at some point in the future. And AIG can still tap another $30 billion in credit lines extended by the government.

All of that money has bought the feds 79.9 percent of the insurance giant—the most it can own without triggering accounting rules that would effectively nationalize the whole company. To pay back the government, AIG has developed a long-term plan to break itself up and sell off various insurance divisions and other assets. But the horrible economy makes it a fire-sale market, with many bids coming in at less than half the asking price. So it could be three to five years before all of AIG's assets have been spun off. The government's exposure should shrink later this year, when the $45 billion credit line drops to about $20 billion. But Ethisphere still predicts that the government will recoup far less than what it has plowed into the sinking firm.

Chrysler ($14.9 billion). The government gave Chrysler $7 billion to stay afloat prior to its bankruptcy filing in March. That money essentially disappeared when the company declared bankruptcy in April. Then the government provided Chrysler an additional $8 billion in financing to help it exit bankruptcy in exchange for an 8 percent ownership stake in the new Chrysler. The idea is that Chrysler will go public at some point, sell shares, and buy out the government's position. But the return to the government will probably be well below face value, since the government holds a relatively small stake in a company that's still endangered. "The government will get back materially less than its $8 billion principal," says analyst Stefan Linssen of Ethisphere.

CIT Group Inc. ($2.3 billion). A string of strapped borrowers and a heavy debt load have nearly sunk CIT, a financial firm that lends money to small and medium-sized businesses. The firm escaped a bankruptcy filing in mid-July when bondholders provided fresh funds to keep the firm operating. But the interest rate is high, and many analysts think a bankruptcy filing is still likely. The Treasury Department, meanwhile, has hinted that it has already written off CIT's $2.3 billion in TARP funds.

Citigroup (NYSE:C) ($45 billion). The huge bank posted a $4.3 billion profit in the second quarter, but that's only because it spun off its valuable Smith Barney brokerage unit. Otherwise, it would have lost money, and by almost any measure, Citi is a deeply wounded bank. Its market value is just $16 billion--one third of the government's cash investment in the company. For the foreseeable future, Citi is likely to wrestle with mounting losses on credit cards and other consumer loans. In addition to $45 billion in TARP funds, the government has guaranteed a humongous pool of dodgy Citigroup assets worth $301 billion. Citi paid $7 billion for the insurance and must absorb the first $39.5 billion in losses. But after that, the government would bear 90 percent of any write-offs. That gives taxpayers long-term exposure to Citi's troubled balance sheet. Chief Executive Vikram Pandit has insisted his firm is on a path back toward sustained profitability, which will allow it to pay back the government. But Citi hasn't announced any timeline for paybacks.

General Motors ($50.7 billion). That long-forgotten $13.4 billion bailout last December was just a down payment, it turns out. Through bankruptcy funding and other expenditures, the government has nearly quadrupled its investment in GM, in the process gaining 60.8 percent ownership of the new company. For the government to get all of its money back, Ethisphere calculates that GM would have to achieve a market value of $80 billion--which would be 43 percent higher than GM's value in 2000 when the automaker was highly profitable and much larger. With half as many divisions now and falling market share, it's hard to see how GM could ever reclaim its former glory (or profits).

Ethisphere estimates that taxpayers will be lucky if they get back $20 billion, a mere 40 percent of their investment in GM. GM argues that its implied market value, taking into account the prices its bonds are trading at and other factors, will allow a higher repayment, closer to $34 billion. And that could go up, GM insists, if the company does well.

GMAC ($12.5 billion). GM's car-financing arm also writes mortgages, which got it into deep trouble, forcing the lender to take more bailout money than any bank except for Citi, Bank of America, and Wells Fargo. Part of GMAC's funding came with the auto bailout, to help ensure that car buyers who want to buy GM or Chrysler vehicles can get loans. But Ethisphere believes that with GMAC's vast exposure to two depressed industries--cars and homes--at least $5 billion of GMAC's TARP funds are a complete write-off. GMAC says otherwise, insisting that it's taking the necessary steps to strengthen its business. "We intend to repay the full TARP investment over time and have been making scheduled dividend payments on the investment," says spokesperson Gina Proia.

Marshall & Ilsley Corp. (NYSE:MI) ($1.7 billion). This bank holding company, parent of M&I Bank, is based in Wisconsin, but it made thousands of housing, construction, and commercial loans in Arizona, one of its target markets during the go-go years. With a huge housing bust in Arizona, many of those loans are now worth far less than their face value. That makes M&I one of the most vulnerable regional banks. Ethisphere believes the government could lose $1.3 billion, more than three quarters of its investment. M&I says it's confident that the government will get all of its money back, plus dividend payments. The bank also argues that it has higher "capital ratios" than many other banks of its size and points out that it recently raised $552 million through an equity offering, "clearly indicative of the market's belief that the [government's] capital will be repaid."

Regions Financial Corp. (NYSE:RF) ($3.5 billion). This Alabama-based bank has been losing a bundle from bad mortgages and other loans, mainly across the South. And its CEO said recently that losses are likely to get worse for the foreseeable future. Ethisphere believes taxpayers will be lucky if they get half their money back. A Regions spokesman says the bank plans to pay back its government loans in full, pointing out that Regions has $6.9 billion more in reserves than the required minimum, and recently raised $2.5 billion in the private markets.

Zions Bank Corp.(NASDAQ:ZION) ($1.4 billion). Utah has fared relatively well during the recession, but this Salt Lake City-based bank hasn't. That's because its core markets include California, Arizona, and Nevada--ground zero for the housing meltdown. Zions has lost nearly $900 million so far this year and remains exposed to housing woes. Ethisphere tallies Zions as another 50 percent writeoff, meaning taxpayers might get back just $700 million. Zions says it has plenty of earnings power and reserves to offset future losses, and points out that it recently raised $511 million in capital from the private markets. "Zions believes the company has the long-term capacity to repay TARP in full at the appropriate time," says spokesman James Abbott.